The tricks of your brain
A brief introduction to behavioral economics
“A bat and ball cost $1.10
The bat costs one dollar more than the ball
How much does the ball cost?”
Try to solve this riddle. Give an immediate answer.
Think again.
Read it again.
Give an answer again.
The first answer that pop in your mind is probably “ten” (cent).
According to Daniel Kahneman, behavioral economics’ pioneer and Nobel Prize, this problem calls to mind an easy, intuitive and wrong answer. I am sorry, but if you answered “ten” you are part of our little effort’s club.
Generally, or decisions are based on opinion about uncertain events. Our “I think that…” or “The probabilities are…” are our beliefs with respect to an uncertain event. We rely on heuristic principles which accelerate our reasoning, making it more immediate, but less precise.
Driving your cognitive effort away in order to avoid calculus, you have assumed that the ball costs 10 cent, because in that frame of “one dollar and ten” the answer “ten” was very fit.
This way of thinking can be sometimes useful, sometimes dangerous. Quickly reacting to subtle signs that the driver of the car in the next lane is dangerous can save our own life.
Human beings, as animals do, perceive the surrounding reality through the lens of evolved adaptation. In vision, for example, the experience of color is mediated by the adaptations of the eyes. Using faculties of social perception, humans construct images of the social world in similar ways.
Kahneman says that there are 2 actors who play a role in our decisions: the system 1 and the system 2.
The system 1 operates automatically and quickly, with little effort and no sense of voluntary control.
The system 2 allocates attention to the effortful mental activities that demand it, including complex computations.
The human mind has a pivotal role in the construction of the perceived reality. One of the biggest demonstrations of this central role of the human mind is through cognitive biases.
Generally, human beings ignore statistical data that they have and they rely exclusively on resemblance in making their own decisions.
The resemblance is used as simplifying heuristic, roughly, a rule of thumb, to make a difficult judgment. The reliance on the heuristic caused predictable biases, systematic errors, in their predictions.
The cognitive biases are mind’s shortcuts that arise to give an immediate answer according to an intuitive inspection of the surrounding reality.
The heuristics drive the individual to have a “biased vision”, it means they drive the individual to draw inferences or adopt beliefs where the evidence for doing so in a logically sound manner is either insufficient or absent.
Let’s try to better explain it. You and your brain face this problem:
“All roses are flowers.
Some flowers fade quickly.
Therefore some roses fade quickly.”
At a first sight, your mind should agree with this sentence.
All roses are flowers → it’s okay
Some flowers fade quickly → it sounds good
Therefore, some roses fade quickly → is it a correct reasoning?
Yes. No. Maybe.
It is not a correct reasoning, because it is possible that there are no roses among the flowers that fade quickly.
Trying to better explain the sentence above: your heuristics lead you toward a bias, in a systematic error. This is the error: you believed that the reasoning was correct without having any kind of evidence or any kind of proof to believe it. You gave that answer just because it seemed correct to you.
As suggested by Tversky and Kahneman these heuristics and these biases are mental shortcuts, they lead people to rely on a limited number of heuristics principles which reduce the complex tasks of assessing probabilities and predicting values to simpler judgmental operations.
One of the most significant heuristic is representativeness, where the probabilities that two events A and B occur are evaluated on the by the degree to which A is representative of B, that is, by the degree to which A resembles B.
Hypothesizing the toss of a coin 6 times to check the results on the basis of Head (H) or Tail (T), in your opinion, intuitively, which of the following sequences would be more likely? The (1) or the (2)?
(1) H-T-H-T-T-H
(2) H-H-H-H-T-H
Probably you have evaluated the sequence (1) more likely than the sequence (2), because the (2) seems to be not representative of the fairness of the coin, as a hypothetical sequence of this kind: H-H-H-T-T-T, which does not appear random.
More than 100 biases and effects influence our perceptions and our way of thinking. This is just the first step in order to be aware of the fact that often our choices, our decisions and our perceptions are altered by ourselves, in such ways that appear normal and on which we do not pay attention.
It would be sufficient to be slow down a bit to realize that during the toss of a normal coin the outcome H is equally probable to the outcome T, or that that there are no roses among the flowers that fade quickly.
Doing that can help us in our day-by-day to be more aware of those decisions that require one extra step in reasoning. We are completely capable of taking this step and most of the time this extra step is muffled only by the laziness of our system 2.
Oh, speaking of useful effects, doing that can be useful also to pay a fair price for the goods we buy. The ball’s cost is 5 cent and the bat costs $1.05 (1.05 + 0.5 = 1.10). If the ball would have costed 10 cent, the bat would have costed $1.10 for a total amount of $1.20. I would like to remind you that the bat costs $1 more than the ball, this means that the difference between the cost of the bat and the cost of the ball has to be equal to $1.
You owe me 10 cent!
